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Industry Voices Concern over New Securitization Rule

The FDIC has requested comments from the industry on a new regulation that would limit safe harbor protections for assets, including mortgages, which have been securitized by failed banks. The agency's ""safe harbor rule"":http://edocket.access.gpo.gov/2010/pdf/E9-30540.pdf would be[IMAGE]revised to include preconditions such as a transaction's capital structure, disclosure, documentation, origination, and compensation.

FDIC officials say the rule would return some confidence to the tenuous secondary market, but industry trade groups argue that it could have a counter effect of creating ""substantial uncertainty"" for investors and stifle an important financing channel.

The safe harbor provision was originally written to reassure investors that securitized assets would not be seized by the FDIC when a bank collapsed and could serve as a means of recouping losses.

The ""Mortgage Bankers Association"":http://www.mortgagebankers.org/files/Advocacy/TestimonyandCommentLetters/MBACommentsonFDICANPRReceiverSafeHarbor2-22-10.pdf (MBA) noted in its comment letter to the FDIC, that the revisions are intended to balance ""safety and soundness considerations with the market's need for liquidity.""


""However, MBA is concerned that some key features of the [proposed rule] if enacted, would impose additional transaction costs, generate regulatory uncertainty, and lead to other negative consequences that could pose significant financial and operational obstacles to any securitization framework,"" MBA's chief executive John A. Courson wrote.

The ""American Securitization Forum"":http://www.americansecuritization.com/uploadedFiles/ASF_FDIC_ANPRResponseLetter022210.pdf (ASF) says it strongly believes the new preconditions will harm the drive to reopen securitization markets and slow the flow of credit to Main Street.

“Under the FDIC’s proposals, investors will bear the burden of the loss of the safe harbor if any of the securitization preconditions are not satisfied by the sponsor,” said Ralph Daloisio, chairman of the ASF board of directors.

But Daloisio says the language of the new safe harbor would not only affect investors. He says it could “fundamentally change the economics of securitization” for lenders and potentially “lead to the elimination of securitization in some sectors.”

Chris Killian, VP at the ""Securities Industry and Financial Markets Association"":http://www.sifma.org/legislative/pdf/SIFMA-comments-FDIC-ANPR.pdf (SIFMA), echoed these same sentiments. “We support reasonable efforts to restore and reshape the securitization market, but we do not believe the proposed safe harbor is an appropriate means of regulation,” he said.

SIFMA and the ""Commercial Mortgage Securities Association"":http://cmbs.informz.net/cmbs/data/images/022210cmsafdicsafeharborresponse.pdf (CMSA) both advised the FDIC to coordinate their proposal with Congress’ financial reform legislation in order to avoid placing undue burdens on insured institutions and prevent a “premature” and “piecemeal” approach to new regulations.